This great enthusiasm, while certainly tied to the starring performance as disclosed in Nongfu Spring prospectus, also points to the general optimism among investors on the prosperity of China's bottled water market. This article aims to provide a summary of the status quo, competitive landscape, and future development trends of China's bottled water market.
High growth potential
According to Nongfu Spring prospectus, in 2019, the total value of retail bottled water sales in China reached RMB 201.7 billion, making it the second-largest market in the world after the US. During the period 2014-2019, the compound annual growth rate (CAGR) was 11%. Benefiting from Chinese consumers' heightened health consciousness and growing purchasing power, China's bottled water market will continue to grow. From 2020 to 2024, the CAGR will maintain a double-digit at 10.8%. In 2024, China's bottled water market is expected to reach RMB 337.1 billion.
Thriving mid-to-high priced bottled water
China's bottled water market comprises four sub-segments: natural water, natural mineral water, purified drinking water, and other drinking water. Among them, purified drinking water with a lower average price accounts for the bulk of sales, capturing about 60% of the total retail sales of bottled water.
Before 2010, purified drinking water was the mainstream, with a price of RMB 1-2 per 500ml. Key brands include China Resources C'estbon, Master Kong, Wahaha, and Coca-Cola's Ice Dew.
Thanks to the consumption upgrade and improving health awareness of domestic consumers, the demand for healthier natural water and natural mineral water (typically priced RMB 3-5) in China has risen in recent years, leading to faster sales growth rates than purified drinking water. Key brands include Nongfu Spring’s natural water and Jingtian Baisui Mountain’s natural mineral water.
Owing to its enriched minerals and trace elements beneficial to human health, natural mineral water enjoys the highest market positioning among the three water. It is also the main direction for future product upgrades.
Growing market concentration
In 2019, the top five companies in China’s bottled water market captured a combined market share of 56.2%, reflecting a high market concentration. After over ten years of development, China’s bottled water market has been approaching maturity. With the competition heating, the entry barriers have lifted. Water source, brand and distribution channel have become the key factors for leading companies to win. While major brands have become stronger, other brands have waned or only maintained the lead in a few niche segments.
Nongfu Spring, a clear market leader
In 2019, Nongfu Spring led China's bottled water market with 42% share, leaving the second-ranked China Resources C'estbon and others much far away. According to Euromonitor, since 2012, Nongfu Spring’s top position has remained unchanged, thanks to the company's strong brand development power, extensive water sources and distribution channels. Compared with competitors, Nongfu Spring’s gross profit margin is higher but channel expenses lower, as its sales are more driven by brand power and culture, while other competitors rely more on channels and promotions to drive sales.
Increasing market segmentation
As the overall bottled water market matures, its sales growth is slowing down. Leading companies focus on developing more consumption occasions and shifting to higher-margin segments. Household consumption has become a new growth spot for bottled water, and sales of 4.5L-5L large pack and 14.8L bottled water have surged for their growing accessibility. Meanwhile, bottled water for the specific needs of different consumer groups such as student, mom and baby, the elderly, and female white-collar has also emerged. These products not only help expand the use of bottled water, but also boost product profits.
Premium water in hot demand
Compared to mass-priced water, premium water brands focus more on water sources, and the scarcity of water sources offers the brand premium. In China, premium water is typically priced above RMB 5, while import premium water is above RMB 10. A report released by Tmall revealed that the premium water online sales in China posted a 27% growth in 2018, much higher than the 5% of mass-priced water.
On the backdrop of domestic consumption upgrades, fast-growing demand and high profit margins have attracted both domestic and foreign beverage giants to expand into this segment. Key brands include Nestlé’s Paris Water, Saint Pellegrino, Danone’s Evian, VOSS and FIJI, etc.
At the end of August 2020, Nestlé and Tsingtao Brewery Group inked a strategic agreement, and the latter will take over the drinking water business of Nestlé in China. And Nestlé only keeps the operations of its three imported brands (Paris Water, San Pellegrino and Pune). This reflects a strategic shift made by Nestlé in its water business segment, i.e., from now on, the company will focus more on its flagship international brands and hallmark premium mineral water brands, while investing in differentiated healthy drinking water products including functional water.